Article Published in Banking Technology July 13th 2016
Why are the next generation of virtual cards the key to commercial card adoption? Alex Mifsud, CEO of Ixaris, explores the issue.
Commercial cards are relatively commonplace in the business world, with companies using these cards to buy a raft of business related items, including client lunches, airline tickets & office supplies. Commercial cards come in various forms to suit business needs, from travel cards and purchase cards to the more recent innovation of “virtual” card, which have been available for commercial payments for more than five years.
Whilst the appeal of commercial cards should be obvious, widespread uptake is still relatively low. This is despite the fact they provide a convenient & flexible purchasing option for relatively low value and ad hoc items. In fact, commercial cards have a very small share of commercial spend compared with other payment methods. They account for less than 1% of global commercial payments by value, and 8% by volume.
With such attractive benefits, why are commercial cards yet to make a real impact?
The answer is that the traditional commercial cards model is deeply flawed, mainly because it fails to fit most companies’ accounts payable processes. Evidence suggests that companies are often resistant to adopting commercial cards, physical or virtual, for three main reasons:
- worries about economic viability above a certain transaction size;
- concern about potential abuse if cards are operated with high value limits;
- failure of card models to integrate with e-procurement, or ERP systems that streamline card payments with the accounts payable process.
As such, banks’ commercial cards offerings are stuck in a first generation mode. With limited innovation and a lack of value-added services that would make the offerings more appealing, banks are struggling to unlock the true potential of commercial cards.
More nimble, tech-savvy, and focused fintech companies are increasingly threatening the banks’ positions, with focused offerings, for example enabling straight-through processing, push settlement and providing solutions specifically tailored to industry needs, for example, Amadeus in travel.
The need for “virtualisation” 2.0
By contrast, the latest generation of virtual cards resolve many of the issues that come with traditional plastic and virtual commercial cards and has the potential to drive the evolution of the commercial card model.
Virtual card technology is proven, and offers much greater flexibility and wider functionality, enabling solutions that are better mapped to the accounts payable process. This technology also removes the barriers, enabling banks to take advantage of greater share of commercial spend.
According to Deutsche Bank, “Virtual cards could serve as a ‘catalyst’ for card adoption in commercial and B2B payments, which could double US purchase volume to $160 billion by 2018.”
So, whilst virtual cards have always offered the benefits of real-time’ issuance, flexible multiple-use modes, fine-grain card control, ‘perfect’ reconciliation, and a form of tokenisation, virtualisation 2.0 now takes these benefits much further.
There are four major ways in which virtual cards 2.0 will help banks unlock the revenue growth potential of commercial cards:
- Boosting share of spend through supplier enablement, better “plumbing” and better data, e.g. “automatic” acceptance, buyer-initiated and push payments.
- Taking commercial card usage beyond purchasing – recent innovations now make virtual cards a flexible and economic option for payroll, incentives and rewards, disbursements, dividends, refunds, as well as payments specific to certain verticals such as insurance payouts.
- Deepening vertical specialisation – for example, in the travel sector, beyond the issuing of “virtual” cards for purchasing, travel agents require support for very use-case specific requirements e.g. need for prepaid facilities; surcharge avoidance; to remain valid after a hotel’s initial “card authorisation” check. Similarly, specialised requirements are evident in other verticals such as online media, insurance, real estate management, and construction.
- Changing economics to drive greater profitability for instance through straight-through processing, payment aggregation for cost efficiency and integration with non-card payments rails such as the emerging blockchain-based technology.
Fundamentally, the commercial card sector has huge potential, but requires significant change for this to be realised by the banks. To see true transformation, banks must embrace the evolving virtualised cards model and essentially re-write the economics of the commercial cards business for the requirements of today’s businesses